Options pricing

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narayan07

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Hi All,

Lately I started trading options due to limited capital requirements as compared to futures...

A basic of trade setup I use -

Swing points identified on charts supported by candle stick and chart patterns along with confluence of trendlines or fibonacci retracements.

Though I have just started on options I can see the price of say a call/put option irrespective of what delta/gamma/theta the option models shows in reality they do not exhibit this price ratio conversion.

e.g if stock is @ 100 and I bought 110 call option and with other parm's the delta is 0.55 and theta is 0.45....so for every 1 point price movement this option should move 0.55 on upside or 0.45 on downside...but this doesn't seem to be happenning...

Would appreciate if other experienced option traders can advise me here ?
 
delta is the change in option price as per 1 point change in the underlying.
theta is the change in option price as per change in time value (time decay)

so according to your example:
if stock is @100 and climbs to 101 than price of call option should rise by 0.55.
 
right..as per the theoretical models it should be 100.55 but that is the issue..its not happenning...
 
narayan07 said:
right..as per the theoretical models it should be 100.55 but that is the issue..its not happenning...
Click to expand...

State the instrument. State the bid ask before the move. Then after the underlying has moved 1 unit, state the bid ask then, and state when these things happened. Your first post doens't have enough info. You say it's not happening, but haven't said what DID happen.


Or is this just a hypothetical?


Also might be worth considering that it's not just the delta and theta that have an effect on the price of an option.
 
Shakone said:
Also might be worth considering that it's not just the delta and theta that have an effect on the price of an option.
Click to expand...

Shakone is right - Implied Volatility will effect the price of an option. This is something that a lot of people do not understand. The price of an option can vary from day to day with just volatility alone. As volatility increases so does the premiums. So for example when the market tanks and has a huge sell off, and you think now it is the time to buy call option, you can be right, and still lose money or not make nearly as much, because the volatility is so high, you are paying a premium for it, as the market goes up volatility decreases, as do the premiums and your profits... Hope this makes sense, without trying to write a book about it :)
 
The problem with the sort of calculation you're performing is the "circular" reasoning that's inherent to options pricing. In your case, the option price should have moved by 0.55, according to the delta/gamma/etc calculation, assuming a constant implied vol. If the price of the option moved by a quantity that's different to 0.55, it MUST imply that the "fudge factor", i.e. implied vol, also changed when the underlying moved from 100 to 101.

This is sort of what the previous posters have alluded to.
 
narayan07 said:
Hi All,

Lately I started trading options due to limited capital requirements as compared to futures...

A basic of trade setup I use -

Swing points identified on charts supported by candle stick and chart patterns along with confluence of trendlines or fibonacci retracements.

Though I have just started on options I can see the price of say a call/put option irrespective of what delta/gamma/theta the option models shows in reality they do not exhibit this price ratio conversion.

e.g if stock is @ 100 and I bought 110 call option and with other parm's the delta is 0.55 and theta is 0.45....so for every 1 point price movement this option should move 0.55 on upside or 0.45 on downside...but this doesn't seem to be happenning...

Would appreciate if other experienced option traders can advise me here ?
Click to expand...

hmm...
 
@ Shakone..for more details on the example I have stated - the current stock price was say 100 and the one I had bought was call option 110 @ price of 4.05...the implied volatility then was around 70%.

@Wino..i understand that option prices change based on
1. Orders as entered
2. Implicitly when price moves up/down in relation to conversion of delta/gamma/theta

@Shakone/Wino/Martin....the materials I referred to for options education did refer to changes in options price due to implied volatility...but isn't it that when I bought an option with these values calculated then so the price should move in accordance to it..

P.S - I calculate IV/Delta/Theta values based on the options price...
 
narayan07 said:
@Shakone/Wino/Martin....the materials I referred to for options education did refer to changes in options price due to implied volatility...but isn't it that when I bought an option with these values calculated then so the price should move in accordance to it..

P.S - I calculate IV/Delta/Theta values based on the options price...
Click to expand...
Yes, but IV can change, right? Do me a favor... Take your example and calculate the IV for the option in question when the underlying is 100 with the initial price. Compare that to the IV calculated using the new price of the option with the underlying at 101.
 
simon61 said:
Hi Guys,

Take a look at tastytrade.com a great live show on the internet.
Click to expand...

Thanks Simon61..but already saw their videos on youtube...there is more of their chatting with a few bits of knowledge shared...not only with tasty trade but with other trading videos as well..
 
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